F1 5.11 IAS 38 Intangible Assets: Illustrations

In this session we shall illustrate some of the points raised in the previous session on Intangible Assets.

Illustration 1: Ledford City Rugby Football Club

Ledford City RFC has paid £150,000 for a contract to acquire the playing services of Freddy Tonks for the next three years. Ledford City believe that Freddy will help ensure that fans continue to attend matches and support the club financially.


  • The contract appears to meet the definition of an intangible asset; it is an identifiable non-monetary asset without physical substance and is identifiable as it can both be separated from the club (who could sell the contract on to another club) and it arises from contractual rights.
  • In addition, it is probable that the future economic benefits attributable to the contract will flow to the club and the cost of the contract can be measured reliably (i.e. £150,000).
  • The contract should therefore be recorded as an intangible asset in the club’s financial statements. As it has a finite useful life (i.e. 3 years) it would be amortised on a straight line basis.
    • Annual amortisation charge: (£150,000 – £0)/3 years = £50,000 per year

Illustration 2: Water Bear Publishing Ltd

Water Bear Ldt has paid £487,500 for the copyright to a popular children’s book that has a remaining legal life of 40 years. An analysis of market trends provides evidence that the copyright material will generate net cash inflows for only 15 more years.


  • The copyright will therefore be amortised over the period in which it will generate benefits for the company. Its estimated remaining useful life is therefore 15 years and amortisation should be charged each year as follows
    • Annual amortisation charge: (£487,500 – £0)/15 years = £32,500

Illustration 3: Pangloss Packaging Ltd

Over the past financial year, Pangloss spent the following amounts on two projects:

  • £1.4m searching for an alternative material to plastic for use in the cartons it produces
  • £0.6m testing a new type of plastic that will be used in the manufacture of its plastic bottles


  • The £1.4m spent on finding an alternative material is research expenditure. The project is too far away from a viable product that could be sold, for it to be classed as development.
  • The £0.6m spent on testing a new type of plastic is development expenditure. We can see that it relates to particular products and is quite close to being used. We would therefore test it against the necessary criteria to determine whether or not it should be capitalized and treated as an intangible asset.
    • The information states that it “will be used in the manufacture of its plastic bottles” which indicates that the company must be capable of finishing the development and of using the results in its products. The statement also indicates that the company intends doing so. The costs incurred are £0.6m so the company can measure them reliably, so if the company is confident that it will benefit from the development it should then capitalize these costs. Once the plastic starts to be used commercially, the company would depreciate the cost over the estimated useful life of the plastic.

Illustration 4: Cuttings Ltd

At the start of its financial year, Cuttings Ltd purchased a garden centre from Mr Giles for £595,000 which paid by bank transfer. The fair value of the separable assets and liabilities included in the purchase were:

The difference between the amount paid (£595,000) and the fair value of the net separable assets purchased is the value of the purchased goodwill; i.e. £595,000 – £480,000 = £115,000

The journal used to record the purchase would be as follows:

The purchased goodwill is an intangible asset but it should not be amortised. Instead, the directors should review the asset for impairments. These reviews should take place annually (or when there is evidence of impairment).

If the asset has been impaired an impairment loss should be recorded as an expense. The asset’s carrying value will then be recorded at its cost less the accumulated impairment losses.